MRO Magazine

Fitch Rates Winchester, VA’s ULTGOs ‘AA+’; Outlook Stable


January 15, 2016
By Business Wire News

NEW YORK

Fitch Ratings has assigned an ‘AA+’ rating to the following outstanding city of Winchester, VA general obligation (GO) bonds:

–$106.2 million GO public improvement bonds, series 1999A, 2005, 2006, 2007 and refunding bonds series 2011, 2012, 2013 and 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: General fund reserves are consistently maintained above a conservative 20% fund balance policy. The city has largely maintained a structurally balanced budget demonstrating careful expenditure management and a willingness to tap into its ample revenue raising capacity, as needed.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are expected to remain moderate based on the city’s future capital needs and borrowing plans, and the fairly rapid pace at which outstanding obligations are repaid. Net pension liabilities are moderate and the cost of servicing the city’s debt, pension and retiree health obligations consume a reasonable portion of governmental spending.

NARROW ECONOMY: The city anchors a relatively small regional center for health services, retail, and manufacturing in the Shenandoah Valley area of northern Virginia. Unemployment tends to register below the national benchmark; however, resident income indices measure 5%-15% below Winchester, VA-WV CBSA norms and closer to 30% below the commonwealth. The city’s tax base experienced a significant decline during the recession and a fairly weak recovery to date.

RATING SENSITIVITIES

FINANCES KEY TO RATING: The city’s strong fiscal performance is the key strength in the high ‘AA+’ rating, balanced against more moderate debt and economic metrics. Although not anticipated, the rating is sensitive to shifts in the relative strength and relationship of these key rating factors over time.

CREDIT PROFILE

The city of Winchester is located in northern Virginia in the Shenandoah Valley area along Interstate-81. The city is roughly 75 miles west of Washington D.C. The city has a 2014 population of 27,543 which has grown modestly in recent years.

STRONG FINANCIAL PERFORMANCE

Healthy unrestricted or unreserved balances have been equal to no less than 22.8% of spending over the last decade. At year end fiscal 2015, the unrestricted fund balance of $21.6 million was equivalent to 26.7% of spending. The city’s conservative formal general fund balance policy requires a minimum unassigned reserve equal to 20% of the fund’s current year budgeted appropriations. Liquidity is good with $30.9 million in cash and investments across the primary government in fiscal 2015 which Fitch estimates is equal to roughly 4.5 months of operations.

The city has proven itself to be a careful steward of the budget, typically outperforming projections as was the case in fiscal 2015 where a modest deficit of $159,082 was recorded compared to the planned use of $3.7 million. The fiscal 2016 budget appropriates $1.74 million of fund balance, which would lower the fund balance to a still sound 24% of spending if fully utilized.

The general fund budget is largely funded from a variety of local taxes (property, meals, hotel, etc.), business licenses and service charges that the city has broad discretion to increase. The city has approved increases in several key revenue items in recent years to help offset declines in the tax base and general economic activity. Appropriations to the city school system consume close to 40% of the general fund budget. Fixed costs associated with debt, pension, and retiree health benefits are estimated by Fitch to consume a reasonable 14% of governmental spending. Neither employee wages nor benefits are subject to collective bargaining or contract.

MANAGEABLE DEBT & RETIREE BENEFITS

Key debt metrics are moderate at $3,460 per capita or 2.8% of estimated market value. Planned debt issuance in the five-year capital plan roughly approximates the amount of outstanding debt scheduled to mature over the period so debt ratios should remain stable. Future debt is largely driven by elementary school and self-supporting utility projects.

The city sponsors three separate benefit plans within the Virginia Retirement System that reported an aggregate ratio of assets to liabilities of 86% as of June 30, 2014, and a net pension liability of $11.2 million (a low 0.3% of market value). The city consistently pays the actuarially-based contribution, which was $2.6 million in fiscal 2015 or 2.8% of governmental spending. Retiree health liabilities and annual contributions are minimal.

REGIONAL SERVICE CENTER IN RURAL NORTHERN VA

Winchester is the population, retail, and health services center for a relatively small population of 133,403 residing within the Winchester metropolitan service area (MSA). The city is located approximately 40 miles from Loudoun County and 70 miles from Fairfax County, to which a large number of MSA residents commute for employment according to the U.S. Census.

Healthcare and social services is the leading industry within the city led by Valley Health System with more than 1,000 employees. Shenandoah University, a private liberal arts institution with an approximate enrollment of 3,800 lends additional stability to the local economy. The city’s retail sales per capita are approximately 3x the Virginia average, evidence of the strength of the local business community which includes Wal-Mart, a leading taxpayer and employer in the city. Several notable manufacturers lend diversity to the economy including Rubbermaid and O’Sullivan Films.

Unemployment within the city tends to register between the Virginia and U.S. norms. The annual unemployment rate peaked at 8.3% in 2010 since improving to a healthy 3.9% as of September 2015 on the strength of very favorable job growth. Conversely, the dominance of the retail and manufacturing sectors on annual payroll translate to resident income metrics that measure between 70% and 90% of state and national indices.

Additional information is available at ‘www.fitchratings.com‘.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

Pursuant to Fitch policy, new rating assignments during the exposure draft period will be analyzed under both the existing and proposed criteria approaches. The rating(s) assigned in this Rating Action Commentary would be the same under both approaches.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997969

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997969

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Parker Montgomery, +1-212-908-0356
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com